SBA 7a Loans, Biggest Questions

The SBA 7a loan has been getting a lot of press lately, as it is one of the most viable commercial mortgages out there, and many business owners are trying to get a better understanding of the loan program.  Below are the typical questions that business owners have regarding the SBA 7a loan.    

Aren’t SBA lenders the same?  Should I just work with a local bank?

Though the SBA has set guidelines, banks all have their own lending criteria, and what is considered a doable deal from one bank will not be to the next.  Many borrowers incorrectly think that the SBA funds loans.  They actually just guarantee the funding bank, that in case of borrower default, the bank will get their capital back. 

So the point being, you may get 9 declines from various SBA lenders, than find one lender that really likes your request.  Lending criteria/guidelines does vary.  There is a very good chance that best lender for your request is not local, but maybe located on the other side of the country. 

Also, some SBA 7a loans are structured in different ways.  For example, 99% of banks structure SBA 7a with an adjustable rate.  There are a few banks that offer the loan with a 3 to 5 year fixed rate.  Some other lenders have different focuses in terms of building types.  While some lenders won’t even look at hotels requests, others banks focus almost exclusily on them, for example. 

Will the SBA monitor my business, after the loan closes?

Actually, not at all.   In fact the only time the SBA would get involved is if you default on the loan.  And the SBA would work with the funding bank to remedy the loan, not the borrower.  There is no need to fear a “Big Brother” element with an SBA 7a loans.

How long does the an SBA 7a Loan take to Close?

It should take approximately 60 days to close.  It is very important though to seek out and work only with lenders and banks that very experienced with doing SBA 7a loans.  Many banks, including huge ones, have never done a single SBA loan, so borrowers should be careful with this. 

If the borrower works with an “approved lender” the loan gets underwritten only once and the process should take around 60 days to fund.  This timing is normal, relative to all other  commercial mortgages.  If they work with un unapproved SBA lender, the loan will have to be underwritten twice – once by the bank, than by the SBA. 

I’ve heard the SBA paperwork is intense and require a lot of special forms?

Today’s SBA loans require about the same amount of paperwork and effort as a typical commercial mortgage.

SBA7a loans are one of the most reliable sources of capital in today’s credit crisis for small business owners.  The programs boasts the highest level of financing in the business and is ideal to roll in working capital, business debt, and equipment loans.  It might just be the best program out there for your request. 

 

 

Commercial Construction Loans – Abandoned Deals

 

Commercial construction loans have taken perhaps the hardest “beating” in the current credit crisis.  Bottom line, banks do not want too or cannot take on the additional risks that come with construction loans. 

Further, we have seen many commercial construction loans get canceled.  And we are referring to loans that have closed on the land acquisition component, than the funding bank backing out off the rest of the project.  This is something we have never seen before.  This puts borrowers in particularly difficult positions, as they have debt payments on unfinished projects and puts a stain on the deal for other potential lenders.  As they will all start off with the assumption that the borrower had done something wrong. 

It also puts the funding bank in a very bad position as well, as they have a lot of liability to deal with and stand a very good chance of being sued for damages by the borrower.  They have not honored their commitment.  Also, by not completing the project they further hurt themselves, due to the fact that a good portion of these borrowers may not be able to find financing and will default on their loan. 

Commercial Construction Loan

For example, we recently worked on a project that we could not close.  The project was an automotive repair type construction project, ground up.  The borrower purchased/closed on the acquisition of the land at $600,000 and had financed $450,000.  The other $150,000 was supposed to be the total down stroke of the entire project (not just the land) which had an additional $400,000 construction component to it (it was an SBA loan, 85% financing).  That was basically all of the cash the borrower had.  The bank pulled out and now the borrower has a $4,500 a month interest only payment and very little options on how to entice another bank to come along and complete the deal. 

As far a potential solution on the above transaction (and other similar ones), is for the borrower to bring on a partner.  Though not ideal for the borrower, it is probably the only way to get the above commercial construction loan closed and to avoid a complete financial disaster.  On the above transaction, all of our sources wanted to see cash reserves, post close, of at least 5% of the $1,000,000 project cost and to come into the deal with another 10% injection.  He was at 85% financing and needs to be at more like 75%.       

This is just one example.  Some of our clients that have come to us have had better “endings” to their stories.  For example, we just knew of the sources that would fund their loan requests as is, with no further cash injection or need to bring on a partner.  Bottom line, borrowers that have an “abandon” commercial construction loan, need to figure out a solution, as soon as possible. 

Commercial Bank Loans, Why Bother?

 

Conventional commercial bank loans are well worth the additional scrutiny.  These loans offer the lowest rates, lowest fees, longest fixed periods, and longest amortization schedules currently offered in the market today, for your typical small commercial mortgages (Under $5,000,000). 

The key here for borrowers to realize is that most of the banks that use to offer conventional bank loans are now sitting on the sidelines, waiting for the economy to turn around.  Still other banks don’t have any capital to lend.  However, there are many banks out there that are still offering conventional bank loans.  They may not be local, but they are out there.

Most small local banks that are still lending are now only offering 20 year amortization schedules, with adjustable or 5 year fixed rate programs.  However, there are banks that are still funding 10 year fixed rate loans on 30 year amortization schedules.  For borrowers, increasing the amortization schedule to 30 years can be a substantial increase in cash flow.  Simply by spreading out the repayment period, borrowers can normally get a 20% reduction in monthly payments or more.

Commercial Bank Loans

In addition, the benefits of having a long term fixed rate in this economy are obvious.  Many borrowers (and economists) are very concerned about potential inflationary pressures that might push rates to 1980 levels; as soon as the economy stabilizes and begins to grow again.  Some borrowers have literally opted to refinance out of their current lower rate loan, into a higher rate, though longer fixed rate program due to these concerns.           

Another major benefit to conventional commercial bank loans and the lowered fees offered.  For example, government sponsored programs, such as SBA loan or B and I loans typically charge an expensive 2 -3%, which is rolled into the loan amount.  Commercial bank loans in comparison are normally only 1%. 

Again, the important thing for borrowers to keep in mind is that there are banks out there that are still lending.  Do not let yourself get discouraged.  Perhaps your local banks aren’t lending, or are only offering really conservative programs, but if you take the time to research you can find viable sources. 

Which Loan For Me?

There are many people who do not have ready cash in hand. But they want to make it big in the financial market. For them there are different financing agencies who offer a wide range of no cost loan options. These financing agencies may be corporate banks, commercial banks, mutual banks and mortgage companies.

Each of these no cost loan options has their distinct specialties. One aspect of one loan method may or may not be beneficial for your business. Some of these no cost loan programs are more industry oriented.

This means your business may not have the criteria required for the no cost loan you are applying for. This is where we should take the professional advice. They determine the type of no cost loan which will be most appropriate for your work.

They also work towards achieving the goal of acquiring the loan. They have a very wide network of lending institutions. Many of them have very flexible criteria for the borrowers. In other words, even if you have some problems with your last loan still you can get a no cost loan after working out a solution with them.

Different type of financing companies offers different type of loans. For example: Acquisition & Equity financing: When a company wants to purchase another company or desire for a merger then acquisition loan can be obtained.

This no cost loan can be partial that is the left over money required to complete the transaction. The merger or acquisition can also be fully financed. This no cost loan type requires creative loan structures which may be required to fulfill the collateral needed in order to acquire the loan and it totally depends on individual situations.

Companies going for venture capital or developers opting for gap funding go for Equity financing. Whenever there is a void gap between existing debt and required debt which allows the company to obtain 100% financing for a project Equity financing is used to fill it up.

Accounts Receivable – Factoring: Some medical related companies such as hospitals, urgent care facilities, long term care facilities etc. which require consistent cash flow can aptly go for this type of finance programs. Some other commercial related companies such as manufactures, janitorial services, staffing agencies, consultants which provide businesses to other businesses houses can also opt for this no cost loan program. These programs are highly flexible.

Asset Based Loans: These loans are secured by real estate and are short to mid term (1-5 years). Inventory, stocks, equipment, and other assets can also be used to secure such loans. The rates of this type of loans differ according the circumstances. Companies mostly opt for this loan when bank rejects a former loan request due to less creditable scores of the companies as they already have one or other financing currently in place.

Bridge & Mezzanine Loans: These are short term loans. There is always a time gap between the date of starting a project and getting the traditional financing. This time gap is filled up with these types of no cost loans. These loans are secured via stock within the company.

Hard Money Loans: These types of loan are required by the companies involved in construction projects but are unable to secure the no cost loan amount needed with their asset base. These are short term no cost loans and have a medium to high interest rate. It often requires personal guarantees.

Personal loans: If you have good credit and can show ability to repay a loan you may qualify for a personal loan or signature loan, these types of loans may be more expensive because of the higher risk of default. The advantage of this type of loan is most banks can process the paperwork in one day so if you are in need of cash fast this may be your best option.

PO & Inventory Financing: These types of loans are very expensive. These are obtained mostly by companies who already have a factoring program running or have built up a secure connection with a finance company. These are particularly best for companies which have a very high profit margin. The interest rates are often very high.

SBA Loans: These loans are backed up by the government for minority, women, and startup programs. This loan is also appropriate for small businesses that are running for at least two years.

These are the different types of loans an individual or a business can get to fulfill their project needs.

Hotel Loans ? Now in the Credit Crisis

Where do you start?  Hotel loans whether for purchase or refinance have taken a firm beating in this credit crisis.  Basically, there are now only a few options on hotel loans.  Probably 90% of all conventional hotel loan programs are gone.  Deals over $3,000,000 are taking the worst of it, flagged or unflaged, conventional or nonconventional.

As many readers are aware, the issues on the commercial secondary market is the immediate cause of this mess.  Very few banks are willing to portfolio hotel loans and instead are used to funding and selling the hotel debt off into the secondary market.  Now since there are very few buyers, banks have to either pass on the deal or fund it and hold onto the loan in their balance sheet for the long term.  Most banks would rather portfolio more general purpose properties like office or retail before they’d consider hotels.  So deals that banks where willing to underwrite and fund just a few months ago, they are now backing away from in fear that there won’t be in buyers of the hotel loan. 

Fixed rates on hotels are virtually gone.  The vast majority of all hotel loans are now quarterly adjustable, based off of Prime.  The typical margin is 2% – 2.75% over.  Prime is now at 4% so most borrowers are looking at an effective rate of  6% – 6.75%.  Ironically these are some of the best rates we seen in long time.  But of course borrowers have to live with adjustable rates, and for some borrowers this is hard to do.  Many don’t care (that much) and or recognize that this is the only option.

Debt coverage ratios have in general become more conservative (no surprise here) to a minimum 1.35.  Some banks want to see ratio’s closer to a 1.4 -1.5 on conventional loans.  Which basically means that the funding banks are “cherry picking”.  It also means that the loan to value will be very strong, most likely lower than 50% because the two ratios are tied together.

All in all, SBA loans rule the day with hotel financing.  Again borrowers should be thinking about loan amount less than $3,000,000 to have more options.  And on a positive note, despite all the carnage, borrowers are getting great rates, and high levels of financing through these government sponsored programs, like up to 85% on purchases and 80% on refinances.  As always, the trick here is finding the banks that are actually funding deals with the government programs.  Just as with conventional loan most banks that used to do SBA loans are “on hold” until the market returns.      

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